Major savings providers have vowed to resist any attempts to reduce tax breaks on cash ISAs amid reports that the government is considering lowering the annual contribution limit from £20,000 to £4,000.
The proposal has sparked debate in recent weeks over whether ministers should scale back tax incentives for the popular savings accounts. Chancellor Rachel Reeves is facing pressure from some fund managers to encourage greater investment in the stock market as a means of stimulating economic growth.
Senior City executives have met with Reeves, and during a recent meeting, discussions reportedly included the possibility of capping the cash ISA allowance at £4,000 per year, according to The Telegraph.
The two main types of ISAs are cash ISAs and stocks and shares ISAs, with individuals currently allowed to save up to £20,000 per tax year across these accounts. Savers can either allocate their allowance to a single ISA or spread it across multiple accounts, meaning they can deposit up to £20,000 annually in one or more cash ISAs.
This limit is significantly higher than in previous years— for nearly a decade, the cash ISA cap was just £3,000 per year, before increasing to £20,000 in 2017.
More than 18 million people hold a cash ISA, with nearly £300 billion invested in them. However, earlier this month, Economic Secretary to the Treasury Emma Reynolds emphasized the need to encourage investment, arguing that “cash is not a good investment” and questioning why “hundreds of billions of pounds” remain in cash ISAs.
Despite this, cash ISAs play a crucial role in the financial system, providing banks and building societies with a vital source of funding for loans to households and businesses.
Nationwide, the UK’s largest building society, recently warned that reducing tax incentives for cash ISAs could limit mortgage availability for first-time buyers.
While stocks and shares ISAs offer the potential for higher returns— with an average gain of 11.86% over the past 12 months compared to 3.8% for cash ISAs, according to Moneyfacts— they also come with greater risks and may not be suitable for those with short-term financial goals.
